BALTIMORE -- MEF16 -- The investment picture for telecom hardware and software vendors looks a little bleak, two industry analysts said this morning, noting that virtualization is not yet generating major spending by network operators and the explosion of M&A deals may also slow major capital investment.
Spending on optical gear and fiber is strong, noted Michael Genovese, managing director and communications equipment analyst for MKM Partners , and router sales continue to go up to support greater bandwidth, but falling prices are keeping revenues flat.
But investment opportunities in the NFV/SDN space have yet to materialize, he noted, with a lot of smaller software companies struggling to differentiate themselves.
"I want to be able to talk to my clients about winners in NFV and SDN," Genovese noted, "but I don't have a stock to point to. Unless you are a venture capitalist, it's hard to invest in this market."
There are network operators moving forward -- he cited AT&T -- but they have not yet identified key vendors with whom they are working and are instead looking at doing a lot of work on their own.
"I haven't heard a carrier say, 'here is a really good small software provider and we are going to grow with them for a long time,' " Genovese said.
Meta Marshall, vice president of equity analyst for communications systems and applications at Morgan Stanley , agreed the virtualization market is progressing slowly as an investment opportunity and took it a step further. She noted that many vendors invest heavily to meet Tier-1 service provider expectations early on in a new technology market and count on making their profits selling to later-moving players such as smaller network operators.
"The amount of time when a technology provider can capitalize on all the investment they are putting into Tier 1s is getting longer," Marshall said. "That puts margin pressure on [the vendors] because they are investing more in services and it will take longer before they see market opportunity."
Genovese pointed to the SD-WAN area as a good example of what is currently happening. There are a number of small vendors in this space, with software-based SD-WANs or appliances, and they are winning business from some of the bigger carriers, but none has broken out as a major success. And more than likely, if one of them does, they will quickly be acquired by a bigger player, before investors can take advantage, he said.
Both analysts said the major M&A activity stands to slow down investment as well, in part because the two players take a pause to reassess spending plans as part of the integration process, but also because money that might go to organic growth is instead put into the acquisition, Marshall noted.
Other things putting pressure on vendor profits are the slowdown in spending on the wireless side as that industry prepares to address 5G wireless, Genovese noted, and the growth of interest in white boxes.
Open source is another industry force, and the financial analyst said that is pushing vendors toward a services strategy as they deliver open source-based solutions but provide the distribution of the software and the ongoing integration and support.
— Carol Wilson, Editor-at-Large, Light Reading